3Com to spin off Palm unit

IPO is response to increasing competition in networking and handheld businesses.

3Com said Monday it will spin off its Palm Computing unit as an independent company.

In a statement, 3Com said the new structure will "enable 3Com and Palm to build on their market leadership positions in networking and handheld computing". The Palm division, which makes the Palm Pilot handheld organiser, is one of 3Com's growth businesses. In 3Com's latest quarter, Palm sales amounted to about 10 percent of revenue.

Analysts have been pushing for a spin-off for months as 3Com has struggled amid growing competition. With 1999 sales of $570m (about £347m), the Palm unit was among 3Com's fastest-growing businesses. 3Com beat estimates in its latest quarter, but concerns about revenue growth persist. 3Com reports fiscal first quarter earnings 21 September. The First Call consensus estimate is 24 cents a share.

3Com said it will launch an initial public offering (IPO) for its Palm Computing subsidiary early next year, and will spin off the balance of the shares of the new publicly traded company to 3Com shareholders. 3Com shareholders will ultimately own shares in both companies. "Creating the industry's first independent, publicly-traded handheld computing company is a significant milestone, reflecting both the current success and the future potential of our Palm business," said Chief Executive Officer Eric Benhamou in a statement. "The formation of two distinct companies, each with greater flexibility, agility and focus, is expected to create more value for our shareholders, customers and employees."

The Palm unit and 3Com will need to focus. 3Com is under fire in its networking business from competitors such as Cisco Systems in the corporate world and Intel in the small business/consumer space. And the Palm unit faces pressure from Windows CE-based competitors and upstarts such as Handspring, which was founded by the Palm Pilot creators. Handspring's Visor is poised to press the Palm Pilot on speed and cost.

3Com was most likely hearing the footsteps from Handspring, which was a likely candidate to go public and make a big splash. 3Com said the Palm unit will focus on the following markets: handheld operating system licensing, enterprise computing, wireline and wireless Internet services, portal sites and Palm-branded devices. 3Com will be among Palm's first customers by licensing the Palm operating system.

Although the Palm unit hasn't officially filed with the Securities and Exchange Commission, 3Com did add that James L. Barksdale, managing partner of the Barksdale Group and former CEO of Netscape, and Gordon A. Campbell, president and chairman of Techfarm, will be on Palm's board of directors. Campbell and Barksdale are currently on the 3Com board.

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